Tuesday, May 29, 2007

Is Wal-Mart Too Cheap for Its Own Good?

A confidential report prepared for senior executives at Wal-Mart Stores concludes, in stark terms, that the chain’s traditional strengths — its reputation for discounts, its all-in-one shopping format and its enormous selection — “work against us” as it tries to move upscale.

As a result, the report says, the chain “is not seen as a smart choice” for clothing, home décor, electronics, prescriptions and groceries, categories the retailer has identified as priorities as it tries to turn around its slipping store sales, a decline likely to be emphasized Friday during Wal-Mart’s shareholder meeting.

“The Wal-Mart brand,” the report says, “was not built to inspire people while they shop, hold their hand while they make a high-risk decision or show them how to pull things together.”

The document, prepared in October 2006 by the company’s former advertising agency and based on interviews with scores of consumers, offers a candid, wide-ranging explanation for why Wal-Mart, the No. 1 seller of everything from laundry detergent to underwear, has stumbled badly when it comes to higher-end merchandise like silk camisoles and shag accent rugs.

The report contends, for example, that “our low prices actually suggest low quality” for products like high-definition televisions. And it says that Target, with its designer-inspired clothing and furniture, feels “like the ‘new and improved,’ while Wal-Mart often feels like the ‘old and outdated.’ ”

A copy of the 55-page report, written by GSD&M Advertising, was provided to The New York Times by WakeUpWalMart.com, a union-financed group highly critical of the retailer. The group said that a person outside of Wal-Mart gave it the report.

GSD&M, which has worked with Wal-Mart since 1974, submitted the report as part of an elaborate campaign to remain Wal-Mart’s ad agency after the retailer said that it might choose a replacement last year. Ultimately, Wal-Mart chose other firms.

Nick Agarwal, a spokesman for Wal-Mart, said that the seven-month-old report was “out of date and, in some areas, it is just plain wrong.” Sales in the chain’s pharmacy, electronics and grocery departments, for instance, are very strong, he said. GSD&M, a division of the Omnicom Group based in Austin, Tex., declined to comment.

Its report is at times prescient. As Wal-Mart’s clothing and home furnishing businesses have struggled, sales at stores open for at least a year fell to the lowest levels in decades over the last 12 months, well below those of Target. The figures are not expected to improve much over the next year, unsettling investors.

The GSD&M document offers a rare glimpse of the concerns that are buffeting Wal-Mart’s retailing empire, from its flagging corporate reputation to the “near catastrophic” economic pressures faced by its working-class consumers.

Wal-Mart attracts 138 million shoppers a week, a staggering figure unmatched in American retailing, but the portion of Americans who say the chain is their No. 1 destination for discount shopping has fallen from about 75 percent two years ago to 67 percent today, according to the report.

No specific explanation for the drop-off is provided, but Wal-Mart’s ad agency suggested a combination of factors, like stiff competition and public relations troubles. Those troubles have included a sex discrimination lawsuit filed on behalf of 1.6 million female current and former employees and firings of top executives, like the former vice chairman Thomas M. Coughlin, for stealing company funds.

Wal-Mart’s rating as a company that consumers trust and respect “steadily declined” over the last two years, the report said, as labor groups and elected leaders criticized its wages, benefits and practices. “While corporate respect may not be a highly rated driver of store choice,” it said, “this intangible quality cannot be underestimated.”

Wal-Mart has said that its own analysis has found that just 0.04 percent of customers have stopped shopping at Wal-Mart because of its reputation.

Chris Kofinis, director of communications at WakeUpWalMart.com, said, “Wal-Mart needs to realize that improving its public image and its business reputation demands they stop ignoring the fact that the American people care about values, not just value.”

The report by GSD&M also says several big-box rivals are meeting shoppers’ needs better than Wal-Mart. Best Buy, for example, provides “information and knowledge” to help buy electronics, the report says. Kohl’s provides “a wide selection of brand-name apparel” displayed “in a stylish environment that inspires browsing,” it says. And Bed, Bath & Beyond has “great displays that provide ideas on how to pull looks together,” it adds.

The economy is not helping matters, the report says. After living through the “decade of affluence” in the 1990s, Americans may now be entering the “decade of retreat” as real wages remain flat, fuel prices spike and consumer debt reaches all-time highs, it says, adding, “We have a crisis in the making for America’s working and middle classes.”

A significant portion of the report portrays Wal-Mart positively. In interviews, shoppers said the chain saves them money, time and stress, which suggests that the retailer’s low-price heritage is “as relevant today as it ever was.” Asked by GSD&M to describe Wal-Mart as if it were a person, some consumers compared it to a handyman, a grandmother and Uncle Sam. The report also asserts that “for most people and for most shopping occasions, Wal-Mart is the smart choice.”

The bulk of the report, however, examines the challenges facing Wal-Mart as it tries to transform itself from a chain focused on basic household items sold at low prices into one known for style.

Wal-Mart’s 200,000-square-foot stores, brightly lighted, minimally decorated and teeming with signs for price rollbacks, have served the chain well for much of the last 40 years.

But now, as Wal-Mart experiments with contemporary clothing, flat-screen televisions and nine-layer lasagna, that format has become a hindrance. To a shopper who wants to purchase a single dress for an evening out or a DVD player to watch a movie, “Wal-Mart’s one-stop shopping format becomes a time-consuming irrelevant obstacle,” the report says.

That environment is conducive to “zero-time” shopping, in which a customer spends just a few seconds thinking about a product, like a new bottle of dishwashing soap. “But people don’t buy electronics, home décor and apparel in zero time,” the report says.

“They shop for them,” it continues. “Those are slow-time shopping trips that require, unique, slow-time environments that provide a level of service, a sense of style and an array of ideas that inspires shopping.”

Wal-Mart’s advertising agency recommended a series of solutions, though the company has so far not adopted most of them. For electronics, it suggested creating a no-hassle, no-questions-asked returns policy that would make people feel more comfortable buying expensive televisions and stereo systems.